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Facebook goes into debt for the first time in its history

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Facebook borrowed $10 billion using a technique the company had never used before. Facebook had never needed to resort to such a big operation. GAFAM companies often use this technique, but Facebook had never had to.

A 10 billion bond issue

On August 4, Meta filed a document with the Securities and Exchange Commission (SEC) explaining that they had taken out a $10 billion loan. Facebook’s parent company is now in debt for the first time in its history, as information was confirmed by Mark Zuckerberg’s office to Reuters on Tuesday, August 9.

Meta Inc., the company behind Instagram and Facebook, experienced its first 1% drop in revenue in the second quarter of 2022. This happened for the first time since its IPO in 2012.

Mark Zuckerberg’s company has put everything it had in the metaverse, while the economic context is not helping the tech sector. The development of virtual and augmented reality is very expensive and the economic context is not helping at the moment.

The tech giant spent more than $10 billion in this sector alone in 2021. The following year, due to budget cuts, Meta found a solution by issuing bonds.

Meta is the only company among the GAFAMs to never have gone into debt. However, their results were not good in the second quarter and they had to change their strategy. Their profit fell 36% from the previous year, which forced them into debt for the first time.

A bond is different from a corporate stock in that the bond’s repayment and interest do not depend on how the business operates. Newer investors should be aware of this difference.

Meta is now competing with other apps like TikTok, ad revenue is down, and the world is in economic trouble. These factors have motivated Meta to make big changes and invest in order to change the way its social networks, including Instagram, work. However, overall, investors might not see much more opportunity in the coming months as interest rates rise.

The metaverse is expensive

Meta says Apple’s App Tracking Transparency has caused them significant economic harm for over a year now. The drop in ad revenue has also had a huge impact on their business, as well as other California-based companies. Many advertisers are withdrawing their demand for ads due to soaring inflation and fears of a looming recession.

Daniel Ives works as a financial analyst at Wedbush Securities and told Reuters that Meta should have been borrowing money for a while now. He thinks the company making this move now is a good idea because it will allow Meta to continue to invest heavily in its metaverse strategy. The company could use the loan to buy back shares, make other acquisitions or even borrow for a longer term.

Facebook needs money because their cash flow is low, and funding a huge project like Metavers (where people’s behavior is still changing and support is new) would take over a decade. The initial opinion on this change in behavior and the addition of support is not yet in line, so the money would be needed sooner rather than later.

Some financial analysts felt that Facebook’s decision to take out this loan was wise, as it would allow them to invest a lot of money in their metaverse. Facebook was the only GAFAM multinational to never have used this method until now.

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